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Cement Sector Analysis Report 

[Key Points | Financial Year '18 | Prospects | Sector Do's and dont's]

  • The Indian cement industry is the second largest market after China. It had a total cement production capacity of about 455 million tonnes (MT) as of November 2018. Cement is a cyclical commodity with a high correlation with GDP.
  • The housing and real estate sector is the biggest demand driver of cement, accounting for about 65% of the total consumption in India. The other major consumers of cement include public infrastructure at 20% and industrial development at 15%.
  • Cement demand is expected to reach 550-600 Million Tonnes Per Annum (MTPA) by 2025 supported by pick-up in the housing segment and higher infrastructure spending. The industry is currently producing 280 MT for meetings its domestic demand and 5 MT for exports requirement.
  • Moreover, the per capita consumption of cement in India still remains substantially low at less than 200 kg when compared with the world average which stands at about 500 kg. In case of China, it is over 1,000 kg per head. This underlines the tremendous scope for growth in the Indian cement industry in the long term.
  • Cement, being a bulk commodity, is a freight intensive industry and transporting it over long distances can prove to be uneconomical. This has resulted in cement being largely a regional play with the industry divided into five main regions viz. north, south, west, east and the central region. The Southern region of India has the highest installed capacity, accounting for about one-third of the country's total installed cement capacity.

How to Research the Cement Sector (Key Points)

  • Supply
  • The demand-supply situation is highly skewed with the latter being significantly higher.
  • Demand
  • Housing sector acts as the principal growth driver for cement. However, industrial and infrastructure sectors have also emerged as demand drivers.
  • Barriers to entry
  • High capital costs and long gestation periods. Access to limestone reserves (key input) also acts as a significant entry barrier.
  • Bargaining power of suppliers
  • Licensing of coal and limestone reserves, supply of power from the state grid, etc. are all controlled by a single entity, which is the government. However, many producers are relying more on captive power.
  • Bargaining power of customers
  • Cement is a commodity business and sales volumes mostly depend upon the distribution reach of the company. Cement is sold in two segments – trade and non-trade. Trade cement is the one sold to the dealers. Non-trade cement is sold directly to the consumers, mainly institutional buyers. Trade cement sells higher compared to non-trade. As such, companies that have a strong distribution network and retail presence tend to have better cement realisations.
  • Competition
  • Intense competition with players expanding reach and achieving pan India-presence. The industry is a lot more consolidated than a couple of decades ago with a few large players controlling substantial market share.

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Financial Year '18

  • The production during the year was 305 million tonnes against the capacity of over 455 million tonnes resulting in an average capacity utilization of around 67%. According to Department of Industrial Policy and Promotion (DIPP) reports, the industry had shown a meagre growth of 06% only in the first of the year in cement production but recovered in the second half with a double-digit growth in production ending the year with a five-year high growth of 6.3%. This growth compares against the contraction of 1.2% in cement output in the previous year.
  • The growth in the second half was primarily on the on account of the support led by government infrastructure projects and housing initiatives and flexible interstate movement of cement due to implementation of GST.
  • The cement industry had to face and overcome various hurdles in the year in the form of latent effect of demonetisation, teething troubles arising out of GST roll out, Real Estate (Regulation and Development) Act, 2016 (RERA) legislation impact, restrictions/ban on sand mining in several states. The industry's woes multiplied with a ban on the cost-effective fuel petcoke by the Supreme Court of India which was subsequently withdrawn. The industry also had to face substantial hike in the prices of petroleum products, imported fuel and petcoke.
  • On the cost front, there was a huge increase in input cost caused by the increase in prices of the fuel imported coal & petcoke. The average petcoke price which was around US$60 delivered in the last quarter of the previous year went upto a level of US$100 during the last quarter of the current year. This was compounded by the increase in Customs Duty on petcoke to 11% from around 3% earlier.

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Prospects:

  • Cement demand is closely linked to the overall economic growth, particularly the housing and infrastructure sector. If the rate of growth of consumption remains low at 5-6%, the existing capacity would be sufficient to meet the cement demand for the next few years.
  • Higher government spending on infrastructure and housing, and rising per capita incomes will be key growth drivers for the cement industry. There have also been positive moves on the policy front, in areas related to ease of doing business, promoting start-ups, rationalising the tax structure and administration, and opening up more areas for foreign investment through the automatic route. The government is substantially stepping up infrastructure spending.
  • From a long-term point of view, overall pick-up observed in the infrastructure spending by the Government and downward trend in the interest rates is expected to revive the demand across sectors. The 7th Pay Commission is expected to aid in housing demand. Government thrust on affordable housing for realizing its vision of “Housing for All” by 2022 and Smart City program should also help in demand growth for cement. The rate of new capacity additions has also slowed down considerably. Therefore, the outlook for the cement sector looks better.
  • On the back of series of reforms undertaken over the past year various agencies including IMF have projected an economic growth of around 7.3% to 7.5% during the current fiscal better than the trends of the previous years. The government has given a push through the budget for construction of cement concrete roads, highways through its unique Bharatmala Project, construction of rural roads under the Pradhan Mantri Gram Sadak Yozana, housing for all by 2022, metro rail networks in several cities, bullet train, etc which augur well for the industry in the medium term.

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